For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

This morning I saw on a website that the spot price of gold had soared to $1,600 an ounce, up over 30% in the past year. What can we as investors say conclusively say about gold? Two things, I think: First, now seems exactly the wrong time to be thinking about gold as an inflation hedge. Second, now is probably not a good time to be buying gold jewelry, if such is your passion.

Among “gold bugs,” the standard argument for buying gold is the risk of financial Armageddon: If the Federal Reserve mismanages the money supply, the United States will be engulfed by hyperinflation and the dollar will be debased. Only real assets like gold will preserve their purchasing power.

Yet despite the recent stimulus that the Fed provided—whether through traditional means (low interest rates) or nontraditional approaches (asset purchases like QE1 and QE2)—inflation is not surging. The shorthand macroeconomic reason for this is simple: Consumers are still reducing debt, corporate demand for borrowing is low, and unemployment is still high. Under such circumstances, the chances of out-of-control inflation are quite remote. (What’s more, if there is an inflation hedge to be had, it looks like much of it is behind us.)

A second argument for gold is the structural change that is underway in investing. Gold is just one of numerous commodities that have surged in value as investors have moved into commodities as an asset class. So, part of the $1,600 price may be the consequence of a long-run shift in investor demand. “Why not get on the bandwagon?” is how the thinking goes.

This is the “greater fool” argument—the argument that you’ll be able to sell for $2,500 or $3,000 an ounce gold (or some other asset) you acquired at today’s prices. This would be a good rationale if your timing skills were perfect. But in a world where timing skills are quite imperfect, building a portfolio on these types of bets is like building on quicksand—dangerous.

A third argument for gold is what you might call the industrial commodities view. Gold is used in various industrial and consumer applications—jewelry, electronics—and you might believe worldwide demand is on the rise. But to believe this, you’d somehow have to argue that industrial demand will accelerate beyond what’s already reflected in the large surge in gold prices. This seems implausible.

The last time there was a surge in gold prices like today’s was the 1970s. Gold jumped from around $65 an ounce in early 1973 to $850 an ounce in early 1980—a 13-fold increase, equivalent to earning more than 40% a year on your money.* This increase occurred in an environment with actual surging inflation, as opposed to today’s scenario, which is merely the chance of surging inflation. When inflation fell in the early 1980s, spot prices fell by 55%. The price of gold returned to the $300–400 range, where it languished for decades.

Today, gold prices have moved from the low $400s in 2005 to today’s price of $1,600—a quadrupling, equivalent to a return of about 23% per year over six-plus years. My guess is that many investors have been drawn to this asset class simply because of the headline-making short-term performance. Had you bought gold six-plus years ago, you would have made more than 20% per year on your money.

Surging prices, investor regret about missing the bandwagon, a theory of why prices “must” go higher—these are the necessary elements of a bubble. A true bubble could have an even larger exponential price rise. But we won’t know until after the fact.

My own theory is that if you’re buying lots of gold today at $1,600 an ounce, you are playing to a greater-fool theme. It’s a gambler’s bet. If you do proceed on this course, make sure it is money you can afford to lose. The risk is that you could build up a position in gold at today’s prices—only to discover that it was the investor selling to you who made the right call.

Like this:

Steve Utkus

Steve Utkus oversees the Vanguard Center for Retirement Research, which studies many aspects of retirement in America—from how individuals start saving and investing in the early part of their careers, to how they prepare for actual retirement, to how they spend down their savings once they’re retired. Steve is particularly interested in behavioral finance—the study of how rational decision-making is influenced by human psychology. His current research interests also include the ways employers design retirement programs, and new developments in retirement in other countries. Steve holds a B.S. from the Massachusetts Institute of Technology and an M.B.A. from the University of Pennsylvania's Wharton School. He began working at Vanguard in 1987 and has served as director of the Center for Retirement Research since 2001. Steve is also a visiting scholar at the Wharton School.

Comments

Byron C. | September 17, 2013 10:18 pm

I just saw the best comment on Gold: Warren Buffet’s comments in the most recent AARP Magazine (excerpted here). ‘What motivates most gold purchasers is that the ranks of the fearful will grow. All the gold in the world would form a 68 foot cube; call this cube Pile A. For that same value, create Pile B. That would consist of all U.S. cropland (400 million acres producing $200 billion annually), sixteen ExxonMobils and a remainder of perhaps one trillion dollars. Would a rational investor select Pile A over Pile B?

Anonymous | November 29, 2012 11:25 pm

I have some gold of which I bought several years ago. The economy is sluggish at best since the Feds owe so much money the stock market can do little make any profit. Stocks, stock funds, and bonds are poor at best. Then couple this with 0 percent on CDs, MM accounts and the Feds are happy to take away any interest that you would have gained. I don’t see anything out there that is a good risk now. The average investor does not have the necessary information when it is a good time to buy or sell, buy the time you find out it is already to late. I have taken enough losses from my mutual funds which have paid 1-2 % on thousands invested and then when the stock market crashed in 2008 saw several funds never recover and have since taken a loss and got out. I would like to buy some more gold but it is looking like a crap shoot now to.

Anonymous | September 7, 2012 11:11 pm

As long as our debt rolls on and paper dollars are printed to buy our own bonds (that no one else seems to want anymore) the more the value of gold (and silver) will continue to grow. Russia, China and India are all buying and hoarding gold. Wonder what they know. Wake up…..add gold to your portfolio and protect yourself from the collapsing dollar.

Anonymous | February 4, 2012 3:23 pm

Many investments analysts recommend to consider gold, silver and others in your portfolio, because they recognized that the dollar value is weak at the current time and will stay this way as long as the USA is in big dept. They anticipate that the inflation rate will be bigger and bigger and you will end up with spending high dollar value to purchase anything. In this case the gold and silver will be the only source of money that can help defeating the inflation. if this is correct then better to buy gold as stock or as coins and save them for the tough time down the road.

Please I would like to hear your opinion on this, but I know the future prediction is difficult and who knows if the gold price will stay as strong as today.

Anonymous | January 18, 2012 1:56 pm

O.K. guys – lots of good commentary for and against gold. But can anybody list two other good
investments for this time period? Stocks have done nothing for a decade (from a buy-and-hold viewpoint), bonds are at historically low interest rates, real estate is in the tank, and the dollar index has been dropping for some time. I’m running short of ideas…

Anonymous | December 20, 2011 10:42 pm

Okay I see all this compart this to 70’s oil, S&P, blah blah blah………..

Just tell me this. The VG Precious metal fund price doesn’t move with gold, I understand it is mostly miners……..and have been told it will move much better when the economy gets going again I don’t exactly understand this but can someone give me the logic of this and where they see this fund in say 1 year, 3 years and 10 years.

Anonymous | October 1, 2011 7:48 pm

Steve Utkus thinks buying gold is playing to a greater-fool theme. Ignoring the massive currency creation by most governments now and in the future is even worse.
My advice is to buy gold – lots of it.

Anonymous | August 27, 2011 11:55 am

I realize that there have been plenty (probably too many) of comments pro and con about “The Royal Metal” and that it is probably time to shut down the blog but some of the comments “tickle” me. “The primary reason to hold gold is to bribe the border guards”? Really!? Where are we going? The only places I can think of worth going to treat their border guards well (therefore their job is worth more than a piece of gold). If we in the U.S. have to leave, I can’t imagine where to go.

Anonymous | August 26, 2011 1:27 am

Lots oof discussion! But for someone with a few gold coins, (me), my question is regarding taxes. If I need to sell one, do I need to report a gain from the time it was purchased? In the late 70’s or early 80’s. Thanks for answering such a little problem.

Anonymous | August 20, 2011 7:47 pm

Being an item for trade or investment is really only a secondary reason for owning a bit of gold. The primary reason to hold gold is to bribe the boarder guards. It is like a fire extinguisher; you own it in case of serious problem but never expect to use it. A few gold coins in your pocket could easily be worth more than the title to your house or all your stock certificates in your lock box.

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.